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Dr. Ahmed Ali Abrihi *: the exchange rate and inflation in the years of siege
- published in 09/12/2014
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Receive experience siege spotlights the importance of foreign currency in the economic life of Iraq and go out the analysis below to the exchange rate in those years and published in the official documents, the lowest of the exchange rate in the parallel market, at the time.
And the difficulty of accurate data on Iraq's foreign trade broken down by countries This analysis is based bilateral real exchange rate between Iraq and the United States.
And as long as the exchange rate is known units of the Iraqi currency against the dollar also enters the general index of
prices in Iraq than in the United States to calculate this indicator.
It uses the bilateral real exchange rate, here, to measure the extent to stay away from purchasing power parity, which would check the real exchange rate remains constant.
This index is the exchange rate of the dinar against the dollar any inverse reading accepted for exchange rate and the purchasing power of fixed units and is calculated by the following equation:
/ CPI USA ) Re = (1 / E) (CPI Iraq
Re where the real exchange rate of the dinar against the dollar, E the nominal exchange rate to the dollar in Iraqi dinars, CPI Iraq price index in Iraq, CPI USA price index in the United States.
And that after the unification of the base year for the price indices in the two countries, and the real exchange rate of the base year prices.
And the usual display on the real exchange rate at a record level of any real exchange rate relative to the base year: x100% (Re t / Re 0 ) symbolizes the margins where t and 0 for the years and comparative basis, respectively.
And the table below provides the real exchange rate of the Iraqi dinar based on three years: 1988.1991,, 2007. . And as long as the real exchange rate expresses the international competitiveness of Iraq,
the increase according to the deterioration of the ability of competitive, ie, whenever exceeded the real exchange rate of the Iraqi dinar level of purchasing power parity became a national production of goods and services tradable International is unable to compete with goods and services in foreign home and facing increasing difficulties in breaking into foreign markets.
At the same time, the higher the real exchange rate of the Iraqi dinar has become the imports of goods and services relatively cheaper.
That any rise in the real exchange rate weakens the productive investment activity in the home and thus the ability of the economy to create new jobs and these symptoms of Dutch disease.
But, also, the consumer benefit from lower prices for goods and services imported and this is a tangible benefit immediately and directly and comprehensively to all individuals, while the fruits of investment activity affects the national economy and the total community and as a college and most of those fruits deferred.
And therefore complicit individuals in their individual capacities and decision makers who seek to satisfy them to devote Dutch disease at the expense of the future of Iraq and Iraq generations and generations to come.
At the time of the siege dinar dollar rose rapidly and accelerator, but on the other hand was inflation reduces the purchasing power of the dinar exchange rate of the dollar, and collected expressed the real exchange rate of the Iraqi dinar.
And calculations show that we had dropped it when adopting the 1988 figures as a basis for the standard. And reached by a lower real exchange rate of the Iraqi dinar, which in 1994 amounted to 39.7 percent of the level in 1988 and 62.18 percent from the level in 1991 and 8.92 percent from the 2007 level.
Any that exchange between Iraq and the world in those years was much undervalues Iraq, and at the same time increased the ability of Iraq's international price competitiveness.
Iraq and did not benefit from this opportunity to establish the elements of national capacity in the independent technology and manufacturing.
But there have been signs on the accumulation of skills in the management and organization of building and pays tribute to a great and high requirements and in other areas on a limited scale.
And calculates the exchange rate in the parallel market, as it is, will the real exchange rate of the Iraqi dinar even lower, and what is being said or inferred about the impact of the exchange rate in the rest of the variables have the most with the parallel exchange rate.
The decline in the real exchange rate days blockade represents an opportunity to compensate for the imports and exports of openness toward the atmosphere may Diatha siege itself and the extreme scarcity of foreign currency.
Because of the severe scarcity of foreign currency has drawbacks, such as the development of abundance excess.
Although the actual direct implementation of the oil for food program began in 1997, the optimistic expectations on the impact of the agreement between Iraq and the United Nations, in 1996 led to a reduction of the nominal exchange rate of foreign currency in that year a lot.
And provided a glaring example of this decline on the role of expectations changing exchange rates of about 3000 dinars to the dollar to about 400 dinars to the dollar.
Another issue and have profound implications in the understanding of the experience of the Iraqi economy and enrich the knowledge of the economic, but the movement is instant and commodity prices all behind the exchange rate.
And Iraq has begun to gradually regain normal characteristics of the oil economy. And until 2003, Iraq did not retrieve the real exchange rate for the year 1988 and calculated on the basis of 2 dinars to the dollar, which is higher than the official exchange rate much.
And noted that a lot of inflation reduce the real value of the dollar dinar, has become the nominal exchange rate of the Iraqi dinar in 1994, about 4.4 percent of what it was in 1988, but the real exchange rate, as above, 39.7 percent.
In the experiment after the blockade is necessary to pay attention to the impact of inflation in raising the real exchange rate of the Iraqi dinar, and while the impact of inflation, from this angle,
a positive time of the siege, the exaggeration in the exchange value of international real Iraqi dinar became negative in recent years due to inflation.
I've moved the nominal exchange rate of the dollar against the dinar faster than the rate of inflation between 1988 and until 1995, and since 1996 accelerated the rate of inflation and did not exceed the rate of exchange until 1998 that reached him in 1995 because of the trauma positive for the Convention on the oil-for-food, and remained between 1999 and 2003 a close between 1930 and 1963 dinars to the dollar and fell later, as we shall see.
Experience has shown the blockade compared to what then thread inflation and the exchange rate when the economy works under the under the balance of payments and the economy to be free from this constraint ever-correlation between inflation and the exchange rate.
Therefore it seems that the exchange rate is the one who led inflation likely, the beginning of the siege, as stating the equation below, which linked the annual change in the index of consumer prices delcp with the annual change in the exchange rate (dinars to the dollar) delex and change the backward exchange rate delex-1 and time t.
And if it can not prove the co-integration of the small sample, there remains any doubt as it may be a real regression. But tests in favor of safety. Private and that differences in order to avoid the problem of root mono and autocorrelation :
delcp t = - 0.345 + 0.929 delex t -1 + 0.0435 + 0.209 delex did
R-Sq = 98.8%; R-Sq (adj) = 98.3%; Durbin-Watson statistic = 2.03764
And we include t tests for fixed and regression coefficients, respectively, from left to right 2.56-, 16.53, 3.83, and 3.27, which indicates that the estimates and moral significance levels: 0.04, 0.00, 0.01, 0.01, respectively, confirming its safety.
The evolution of the exchange rate of the Iraqi dinar between 1988 and the end of the siege
A ratio of 2
The base year
Source: Based on data prepared by the Central Bureau of Statistics and Information Technologies and the American Federal Reserve and N. Central Bank of Iraq .
I've traded interested in the cash economy, the time of the siege that excessive monetary expansion and inflation bug was the deterioration of the exchange rate of the Iraqi dinar, but the indicators below indicate lower cash balances true in that period.
They have become less in 2002 than it was in 1991, less than half, and in 1995, about five in the sense that the increase in the money supply was less than the rate of inflation, a large margin.
And it is not uncommon lower cash balances real with constant volume of real income or increase it and "not uncommon this" and that I found in the statements of other countries, of the arguments advanced by Romer to indicate that the money bug inflation in the long term (Romer, p 515).
And if we assume that estimates of real GDP and final audited, it means a significant increase in the speed of rotation of the money as shown in the table below.
However, the jump in the speed of rotation of money that appeared in the year 2000 relate to, perhaps, running for renewed crude oil exports, which lifted GDP at current prices.
And likely explanation for the movement of monetary variables in the time of the siege, which deserves further lesson: that the exchange rate led inflation, and the response of the general budget of glacial and partial, and this was not the money supply abreast of inflation, but behind him, because government spending that was financed with loans from the the central bank is specified for the money supply.
Interestingly, government spending remained determinant of money supply: at the time of the siege across paragraph net domestic credit in the monetary base, and after the siege net foreign assets of the central bank and that Pena how to accumulate due to government spending financed by the oil supplier.
And the fact that oil supplier and the use of it remained outside the budget because of the financing system of oil for food program and the circumstances of the siege Otherwise, it may have affected those exceptional situations on the data itself, apparently.
The resulting time and money siege
At current prices
The narrow M1
For real cash balances
Source: website of the Central Bureau of Statistics and Information
Technology, and the website of the Central Bank of Iraq.
The above table shows the following diagram and how that cash balances remained without a real increase but decreased from what it was in 1991 and this guide,
on government spending and the money supply Thrkia slowly behind the sharp deterioration in the exchange rate of the Iraqi dinar and who was the leader of prices by regression analysis and experience of those years from pension and accident collapse in prices expectations in 1996 and named after the popular vocabulary "medicines" open signifier and stillness waw and that means the collapse of the detonator.
Real output and cash balances in real time of the siege in Iraq
The years 1991 - the 2,002th